WV Center on Budget and Policy > Blog > Tiered Natural Gas Severance Tax Proposal Effectively Doesn’t Change Much

Tiered Natural Gas Severance Tax Proposal Effectively Doesn’t Change Much

One of Governor Jim Justice’s proposals in his Fiscal Year 2018 Executive Budget was to tier the state’s severance tax on coal and natural gas. Rather than the current flat 5 percent of production value, a tiered severance tax rate would adjust based on the price of coal or natural gas. While the budget document did not have the details of the proposal, Senate Bill 415, introduced this week at the request of the governor, shows how that would work for natural gas.

SB 415 replaces the 5 percent severance tax on natural gas with a tiered rate based on price. The rates range from 5 percent for when the price of natural gas is at or below $3.00/MCF up to 10 percent when the price is at or above $9.00/MCF.

While the bill potentially doubles the severance tax on natural gas, it is unlikely to have much of an impact. The last time the average price of natural gas produced in West Virginia was above $3.00/MCF was in FY2014, when the price averaged an estimated $4.12/MCF, and natural gas severance tax collections peaked at $161 million. Since then, the price of natural gas has plummeted, and for FY 2016, the price of natural gas produced in West Virginia averaged an estimated $1.08/MCF.

Under the tiered tax system in SB 415, the price of natural gas produced in West Virginia would have to nearly triple just to bump up the rate from its current 5 percent to 5.5 percent. And that dramatic increase in price does not seem likely anytime soon. According to the federal Energy Information Agency, the national price of natural gas is projected to increase by 2.5 percent per year from 2016 to 2050. At that rate the price of natural gas in West Virginia would still only be $2.52/MCF by 2050, well below the threshold to increase the rate.

Despite its potential to substantially increase the severance tax on natural gas, the tiered tax proposed in SB 415 is unlikely to result in any change in the state’s severance tax on natural gas.

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